Introduction |
For seven years, Law 332/2001 has been Romania’s foreign investment law
and, like most of its predecessors, it was burdened by vagueness and
ambiguity, primarily caused by a myriad of amendments that parliament
haphazardly tacked onto it. Some of those amendments were not even
enforceable because they were in direct contradiction with European
legislation regarding state aid offered to investors. The framework
created by Law 332/2001 was a rickety jumble of economic provisions that
did little to stimulate the massive investments that Romania needs. Yet
despite this unfortunate law, real economic growth in the second quarter
of 2008 rose to an almost record-breaking 9.3%. The highest levels of
quarterly economic growth had been registered in July-September 2004,
and October-December 2004, and were 9.8% and 9.5% respectively, making
one wonder whether there is much point at all to Romania having a
comprehensible general foreign investment law.
Certainly, a transparent and understandable investment law that targets
specific areas of the economy for investment does make sense and that
must have been the government’s thinking when, on June 27, 2008, it
enacted the long awaited Government Emergency Ordinance no. 85/2008 (the
“GEO”). The new GEO abrogates Law 332/2001 almost entirely (except for
article 18) in an attempt to create a suitable and transparent framework
for the promotion of investments. It is well-focused and contains
provisions which eliminate discriminatory treatment between Romanian and
foreign investors, redefines the nature of the “incentives” offered and
the fields in which incentives are granted, and provides for the manner
in which state or local authorities can support new investments. The GEO
seeks to stimulate investment in areas that are needed by Romania such
as the processing of agricultural products, the provision of heat and
electricity, the development of renewable energy sources, the protection
and improvement of the environment, water supply, waste management, and
research and development.
The rules and regulations pertaining to investments made under the old
law remain applicable to those investments, but the supervision of their
proper enforcement by the authorities in charge of granting the
incentives is now done in accordance with the new GEO. |
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Principles of the GEO |
Romania now has an investment law that promotes a competitive investment
environment providing incentives to registered investments with
transparent and systematic procedures through which local or foreign
companies can easily register; one that contains a variety of fiscal and
non-fiscal incentives targeted to preferred areas of investments, export
production, and the rehabilitation or expansion of existing operations.
Qualified projects, depending on their category, are granted a number of
incentives, including income tax holidays, tax credits, tax exemption
for materials and equipment and job creation, and lower interest rates
for loans. Investors are assured of the right to repatriate profits and
earnings, the repayment of foreign loans and interest, and freedom from
expropriation in accordance with the relevant bilateral conventions
concluded by Romania with their respective country of origin. In order
to stimulate investments, the GEO sets forth a series of principles in
Article 2, as follows:
i) The first principle is that of the equal treatment of all investors.
Romania must treat and analyze all investors equally and in a
non-discriminatory manner. In the different versions of former Law
332/2001, as amended, there had been several provisions that favored
foreign investors over domestic ones with fiscal tax exemptions and
deductions. These were meant to attract foreign investors to Romania but
they also fostered a discriminatory anti-competitive business
environment that created a less than level playing field for domestic
competitors in effected industries. The new GEO provides for no
discriminatory treatment whatsoever and is in accordance with the
relevant European legislation.
ii) Transparency – the procedures regarding the grant of incentives
should be easily available to all the interested parties. In accordance
with this principle, state incentives are published on the websites of
the authority granting them, as well as on the web site of the Romanian
Agency for Investments.
iii) The efficient use of incentives – in granting the incentives the
authorities have to apply certain criteria for granting such incentives
and follow their implementation. The investment should not detrimentally
affect the community or damage the environment. The investment should
also promote sustainable economic development. Thus the authorities have
to make certain that the incentives they grant will be used efficiently
in aid of the Romanian economy.
iv) Confidentiality – the entire procedure regarding the grant of
incentives to investors must assure the protection of their intellectual
property rights and of all data that could jeopardize their interests. |
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Investments – a new view |
The GEO redefines the term “investment” and, as a consequence, the
investor. Law 332/2001 refers only to direct investments that have a
significant economic impact, while the GEO enlarges the applicability of
the term “investment” by eliminating the requirement that it be
“significant”. While Law 332/2001 was applicable only to investments
greater than US$1 million, the GEO removes the US$1 million threshold
and is applicable to all investments falling under its scope.
The GEO deems the following activities to be investments:
- Acquiring tangible and intangible assets in order to create a
new undertaking; the expansion of an existing undertaking; the
fundamental improvement and diversification of the production of
goods; acquiring fixed assets by an independent investor that are
directly linked to an undertaking that is liquidated or would have
been liquidated without the above mentioned acquisition activity;
- The initiation of research and development projects and
innovation;
- The creation of new jobs and/or perfecting the skills of
employees;
- The initiation of renewable energy, environmental protection and
sustainable development projects.
Noteworthy is that applicable investments includes the expansion of
research, development and innovation, seeking thereby to create the
resources for the Romanian economy’s further growth. |
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Incentives - Redefined |
The GEO defines incentives as support measures granted to investors by
state or local authorities or by other agencies that administer national
or local resources. In the past, incentives were granted as exemptions
from taxation or as tax deductions, but the new GEO enriches the notion
of incentives by adding cash and in-kind contributions, and bonuses
granted by the state. Incentives may be granted in the form of: a)
non-repayable financial grants if they are used to purchase assets; b)
financial contributions from the state’s budget for each newly created
job; or c) lower interest rates when obtaining credits. |
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Targeted Areas of Activity |
Law
332/2001 was applicable to all direct investments, except for the
financial, banking, insurance and reinsurance fields and, investments
harming the environment, national security and defense, or public safety
and moral order. The GEO’s scope of activities for investment is
specifically targeted to the following fields: the processing of
agricultural products; renewable energy; protection and improvement of
the environment; drinkable water distribution, sanitation and waste
management; informatics and communication; activities of research,
development and innovation of new products; and activities improving and
enhancing the labor force, for example training, recruiting, and new
employment. |
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Granting Incentives |
In order to grant incentives, the state authorities have to issue
decisions or administrative acts regarding the programs of state
incentives or individual incentives (i.e., for applicants outside the
government program) they wish to implement. Such programs have to be
published both on their web sites and on the web site of the Romanian
Agency for Investments and in the Official Gazette of Romania. The state
incentive programs include the types of activities to which the
investments must apply; the categories of investments for which
incentives can be granted, and their value; and the types of incentives
that can be granted under the respective program. |
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Conditions to be met |
The investment and the investor must meet certain conditions in order to
benefit from incentives. Some investment conditions are closely related
to the economic features of the place or locality where the investment
is to be made such as one in an area of low economic development or a
higher unemployment rate than the national average. Other conditions are
related to the purpose of the investment such as building or modernizing
infrastructure, investments based on research, development and
innovation or which require hi-tech, use renewable energy, assure the
protection of the environment or are meant to provide better
professional training for their employees or generate new jobs.
If an investor considers making an investment in Romania for which he
wants to obtain certain facilities under the GEO he has to submit his
investment project together with the request for incentives to the
competent central or local authority. He has to submit such application
prior to the actual implementation of the investment project. In case
the investor is considering investments that fall under the scope of one
of the previously published and approved state incentive programs, the
authority simply verifies whether the investor fulfills the criteria for
receiving the incentive and approves or denies his application. However,
if the investor is requesting incentives that fall outside of an
approved state incentive program, i.e., for individual incentives, upon
the receipt of his application, the competent central or local authority
may issue a letter of intent addressed to the investor regarding the
incentives. Such incentives as provided by the letter of intent are
conditioned upon the prior approval of the European Commission before
the investment project can be implemented. This is because the European
Commission is the only authority competent to approve state aid in the
member states.
There are additional conditions that an investor has to meet. One of
them is that the investor does not have any debts to the state budget.
Another condition is that the investor has not benefited from any state
guaranteed loans in the past. A third condition is that the investor has
not asked the Ministry of Economy and Finance to pay the sums due for
internal or external credits previously guaranteed by the state. The
investor must not be undergoing enforcement procedures or be the subject
of an insolvency or dissolution procedure. The last condition to be met
is that the investor must not be subject to a recovery decision having
as its purpose the recovery of state aid. |
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The investor – Incentive Provider
Partnership |
The Romanian Investment Agency (hereinafter the RIA) represents a focal
point for both the investor and the central or local authorities. The
purpose of this institution is to facilitate contacts between the
investor and the central or local authorities. The RIA also has an
active role through its prerogative to counsel and assist the investor,
upon request, concerning the program that can be used to obtain
incentives. Moreover, the cooperation between the RIA and an investor
may be based on a protocol (upon the investor’s request) that contains
the necessary support measures for the investment project, the competent
authorities involved, eligibility criteria and other issues. In order to
benefit from incentives, the investor has to submit to the central or
local authority a request for incentives, an investment plan and the
entire documentation as provided by the chosen state incentive program.
The competent authority must analyze the documentation, assess whether
the conditions are met and issue its preliminary approval within 30
working days from the date of submission of the request containing the
complete documentation. The competent authorities need to also inform
the RIA of the decision.
Investors’ projects may not fit into an already established state
incentive program. In this case there is another possibility, i.e., to
submit the investor’s plan and documentation to the authorities. In such
a situation, the competent authorities will analyze and then determine
whether the investor may benefit from a different form of state
incentives (outside an existing incentive program), adapted to the
particular case. In order to benefit from such individual incentives,
the investor and his investment must meet the same conditions as when
applying within an existing state incentive program. |
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Law 332/2001 |
As previously noted, the GEO abrogates all of the provisions of Law
332/2001 except Article 18 regarding companies that have made
investments which have exceeded US $1 million. Article 18 provides that
if these companies are voluntarily liquidated within a period of less
than 10 years, they will be obligated to pay all the taxes due for the
entire period of time for which the investment was functioning, as well
as penalties for all taxes and fees that would have already been paid if
the investor had not benefited from the incentives. These sums are to be
paid with priority from the sums obtained from the liquidation process. |
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Conclusions |
One of the most important innovations of the GEO is the equal treatment
provided for all investors regardless of whether they are foreign or
domestic. The procedures that have to be followed and the conditions
that must be met are the same for everyone, as are the benefits that can
be obtained from state incentives. Prior to the enactment of the GEO,
foreign investors had more privileges and as a consequence of this
discriminatory treatment, Romanian business operated at a competitive
disadvantage. The new GEO, which clears the misty clouds that shrouded
Law 332/2001, should direct Romania’s economic boom towards areas of
investment opportunities that are most beneficial to the economy and
provide greater attention to research, development and innovation which
are the backbone of any growing economy. |
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Editors Note: It is our policy not to mention our clients by name in
The Romanian Digest™ or discuss their business unless it is a matter of
public record and our clients approve. The information herein is correct
to the best of our knowledge and belief at press time. Specific advice
should be sought from us, however, before investment or other decisions
are made.
Copyright 2008 Rubin Meyer Doru & Trandafir, societate civila de avocati.
All rights reserved. No part of The Romanian Digest™ may be reproduced,
reused or redistributed in any form without prior written permission
from the publisher.
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